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Consumer flexibility, data quality and targeted pricing

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  • Sapi, Geza
  • Suleymanova, Irina

Abstract

We investigate how firms' incentives to acquire customer data for targeted offers depend on its quality. A two-dimensional Hotelling model is proposed where consumers are heterogeneous both with respect to their locations and transportation cost parameters (flexibility). Firms have perfect data on the locations of consumers while data on their flexibility is imperfect. When consumers are relatively homogeneous in their flexibility, in equilibrium both firms acquire customer data regardless of its quality. This increases profits but harms consumers. When consumers are relatively differentiated in flexibility, data acquisition incentives depend on its quality. Only if the data is sufficiently precise, both firms acquire it and their profits decrease, while consumers are better-off. Our model has particular relevance for location-based marketing such as in mobile telephony, where firms have near-perfect information on the proximity of customers but may have imperfect knowledge of other consumer characteristics. --

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Paper provided by Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) in its series DICE Discussion Papers with number 117.

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Date of creation: 2013
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Handle: RePEc:zbw:dicedp:117

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Keywords: Price Discrimination; Customer Data; Market Segmentation;

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References

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  1. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
  2. Jentzsch, Nicola & Sapi, Geza & Suleymanova, Irina, 2013. "Targeted pricing and customer data sharing among rivals," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 31(2), pages 131-144.
  3. Qihong Liu & Konstantinos Serfes, 2002. "Quality of Information and Oligopolistic Price Discrimination," Industrial Organization, EconWPA 0203004, EconWPA, revised 06 Mar 2002.
  4. Greg Shaffer & Z. John Zhang, 2000. "Pay to Switch or Pay to Stay: Preference-Based Price Discrimination in Markets with Switching Costs," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 9(3), pages 397-424, 06.
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Cited by:
  1. Baye, Irina & Hasnas, Irina, 2014. "Consumer flexibility, data quality and location choice," DICE Discussion Papers 139, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  2. Hasnas, Irina, 2014. "A note on consumer flexibility, data quality and collusion," DICE Discussion Papers 140, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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